What is the formula for calculating total variance in cost accounting?

1 What is total variance?

Total variance is the difference between the actual total cost and the standard total cost for a given level of output or activity. It represents the overall impact of the cost performance on the profit or loss of the business. Total variance can be positive or negative, depending on whether the actual cost is higher or lower than the standard cost. A positive total variance means that the actual cost exceeds the standard cost, which implies a unfavorable outcome. A negative total variance means that the actual cost is lower than the standard cost, which implies a favorable outcome.

2 What are the components of total variance?

Total variance can be broken down into two main components: price variance and quantity variance. Price variance is the difference between the actual price and the standard price of a given input or resource, such as materials, labor, or overhead. Quantity variance is the difference between the actual quantity and the standard quantity of a given input or resource used for a given output or activity. Price variance reflects the efficiency of purchasing or negotiating the inputs, while quantity variance reflects the efficiency of using or consuming the inputs.

3 How to calculate total variance?

The formula for calculating total variance in cost accounting depends on the type of cost involved. For direct materials, direct labor, and variable overhead, the formula is: Total variance = (Actual price x Actual quantity) - (Standard price x Standard quantity) For fixed overhead, the formula is: Total variance = Actual fixed overhead - Budgeted fixed overhead Alternatively, you can calculate the total variance by adding up the price variance and the quantity variance for each type of cost. For example, for direct materials, the formula is: Total variance = (Price variance) + (Quantity variance) Price variance = (Actual price - Standard price) x Actual quantity Quantity variance = (Actual quantity - Standard quantity) x Standard price

4 How to analyze total variance?

In order to analyze total variance, you must compare it with the budgeted or standard cost and ascertain the reasons for the discrepancy. Additionally, you can compare it with the previous periods or industry benchmarks to assess the trends and performance gaps. Common factors that can cause total variance include changes in market prices or exchange rates, quality issues or defects, inaccurate standards or estimates, wastage or spoilage, idle time or overtime, machine breakdowns or maintenance, volume fluctuations or capacity utilization, efficiency or productivity levels, and mix or yield variations.

5 How to use total variance for decision making?

Total variance can help you make informed decisions about cost management and improvement. By identifying the sources and causes of total variance, you can take corrective actions to reduce or eliminate the unfavorable variances and enhance or maintain the favorable variances. You can also use total variance to evaluate the performance of managers or departments and reward or motivate them accordingly. Moreover, you can use total variance to revise or update the standards or budgets and align them with the current conditions and expectations.

6 Here’s what else to consider

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